Why Bernanke's legacy relies on emerging markets

U.S.Federal Reserve Chairman Ben Bernanke will always be remembered for saving Wall Street after the financial crash of 2008. But according to some analysts, his legacy will actually be dictated by the unwinding of the central bank's quantitative easing program (QE) and how that affects emerging markets.

Speculative capital flows, triggered by the Fed's ultra-loose monetary policy, is fast exiting emerging markets, confirming worries over the negative consequences of QE. This, according to the analysts at Bank of America Merrill Lynch, is Bernanke's "financial stability blackspot" which could alter how the central bank chairman could be perceived in the history books.

"Bernanke's legacy may depend, in part, on how policymakers in the emerging market (EM) world manage the massive wave of global liquidity and its aftermath. EM risks support our view that the USD is poised to continue its outperformance in coming years," Brian Smedley, a rates strategist at the bank, said in a research note on Friday.

The Federal Reserve's $85 billion a month bond buying program has provided a steady stream of cash into emerging markets searching for higher returns. However, the central bank indicated last month that low interest rates and extra liquidity won't last forever and this stimulus could be "tapered" before the end of the year.

Capital has disappeared from EM economies, as investors reassess their positions, and analysts indicate that the emerging market bull run has come to an end. Asia's top performing stock markets, including those in the Philippines, Thailand and Indonesia, have erased a sizable portion of the year's gains, and are down around 9 percent since May, when concerns were first raised.

CNBC's Steve Liesman looks at the Federal Reserve and the likelihood of tapering, as well as how much to taper.

Smedley said that a number of parallels can be drawn between the U.S. credit bubble and the conditions that have grown in some emerging market countries. Large foreign capital inflows, which have depressed domestic interest rates, is one key example he gave, as well as robust credit growth, asset price inflation, and new and risky financial products and funding vehicles (think shadow banking in China).

"Capital flows into EM stock and bond markets have surged in the years since the global financial crisis. Portfolio inflows have totaled $1.4 trillion over the past four years, equivalent to twice the rate of inflows seen during the four years prior to the global financial crisis," he said.

"Should the Fed taper QE later this year, and hike in mid-2015, as envisioned in its baseline scenario, it could reveal that some of the biggest cracks are actually in emerging markets."

The slowdown in EMs such as China will play a major role in the global economy over the next few years, Sebastien Galy, a senior currency strategist at Societe Generale, said. Less demand for added-value exports will impact companies, who will be forced to rebalancing their EM operations away from those which are weaker sources of growth, or have higher production costs, he said.

"The legacy of Bernanke will be dominated by his anticipation, emergency handling and then policymaking during the subprime crisis, rather than any consequence on EM," said Galy. "However, a few decades hence historians will most likely fully review the incredible intended and unintended changes these Fed policies have had on EM."

Steven Englander, head of G10 FX strategy at Citigroup told CNBC that emerging markets are receiving the dual blow of cyclical slowdown and the reversal of ultra-low interest rates at the same time.

"We are very optimistic on U.S. growth, it's the rest of the world that's coming under pressure because of it," Englander said on Friday. He added that EMs were initially hesitant when the U.S central bank introduced its asset purchase program, and are likely to be vocal about their fears now it may be scaled back.

"I think they are telling the U.S. that they want you to become 'virtueless' but not so fast, do it very very slowly," he said.